2021: Bitcoin, Hit or Miss?

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While predictions veered toward 2021 being the year of bitcoin, it fell 11% in the last 24 hours after reports suggested a critical flaw may have occurred. Meanwhile, football made it’s first-ever player buy via cryptocurrency. So, what’s the story really?

A NASDAQ report on January 1, 2021 predicted that bitcoin will rise above $100,000 this year and Fundstrat‘s Tom Lee speaking to CNBC soon after, said it would quadruple to well above the $100,000 mark to $116,000. Its price at the time was about $29,000. Today it stands at exactly 24,02,760.65 INR or $32,914.80.

Meanwhile international football jumped the cryptocurrency bandwagon, taking a leaf out of the NFL’s playbook…

Image: David Barral/@interdemadrid
Image: David Barral/@interdemadrid

David Barral, the former Real Madrid B and Levante striker became the first-ever player to be purchased using cryptocurrency when the 37-year-old officially signed for Segunda B side DUX Internacional de Madrid this week. The deal was funded entirely through the use of bitcoin – the digital or virtual currency that uses peer-to-peer technology to facilitate instant payments.

Back in December, Carolina Panthers offensive tackle Russell Okung became the first high-profile athlete in the United States to be paid in bitcoin.

Okung, who will have exactly half of his NFL salary paid in the crypto-currency, has encouraged other professional sports stars to do the same.

“Money is more than currency; it’s power,” said Okung in a statement.

“The way money is handled from creation to dissemination is part of that power. Getting paid in bitcoin is the first step of opting out of the corrupt, manipulated economy we all inhabit.”

Also read: How To Invest In Bitcoin In India 2021 By Pardeep Goyal, Founder of CashOverflow

India crypto
Photo: FM

Note: Bitcoin, cryptocurrency for that matter, are still a fairly new form of investment in India. They are also highly volatile in nature and income from selling is taxed at 30% for short-term investments and around 20% for long-term (3 years). So do pay attention to the flags in this post. Especially when experts warn of a bubble building up with the sudden spike in volatility.

According to the latest global fund manager survey published by BofA Securities, after bitcoin’s massive rally in recent months, it is fast regaining its lost glory. As of yesterday it was trading at $34,750.

“Long Bitcoin jumps to top with 36% of fund manager survey investors saying it is the most ‘crowded trade’ dethroning ‘Long tech’ for the first time since October 2019.”

According to Mint, a similar rally in 2017 was followed by a crash. In 2017, bitcoin rallied from the low of around $790 to a peak of $1,9041 in December. Interestingly, in the December 2017 BofA survey, bitcoin topped the list of most crowded trades. In 2018, it crashed by 74%.

Double Spend

According to Business Insider, bitcoin actually fell as much as 11% on Thursday. Hitting its lowest level in nearly three weeks, as the popular cryptocurrency was hit with a double whammy that jolted faith in its user base.

First, Janet Yellen, President Joe Biden‘s nominee for treasury secretary, suggested during her confirmation hearing on Tuesday that lawmakers “curtail” the use of bitcoin because of its use in illicit activities.

And second, a debunked report from BitMEX Research on Wednesday suggested that a critical flaw called “double spend” had occurred in the bitcoin blockchain.

Double spend is when someone is able to spend the same bitcoin twice. It is a feared and dire scenario for the digital asset, and the blockchain was thought to have solved the issue when Satoshi Nakamoto published the Bitcoin white paper in 2009.

BitMEX Research tweeted…

BitMEX later said it appeared that the double spend was actually an RBF transaction, which is when an unconfirmed bitcoin transaction is replaced with a new transfer paying a higher fee. But BitMEX’s Fork Monitor said that “no (RBF) fee bumps have been detected.”

BitMEX tweeted again…

Ultimately, the double-spend event did not occur, according to Bitfinex CTO Paolo Ardoino. In an e-mail to Insider, Ardoino explained, “In fact, what happened is that two blocks were mined simultaneously. As a consequence, there was a chain reorganization, which did not result in double-spending.”

Passwords & IronKeys

While the “double spend” debunk may be good news for bitcoin owners, another problem that is all too real is the ‘IronKey‘ password. The IronKey, a small hard drive, contains the private keys to a digital wallet that holds the Bitcoin.

Now the problem is that the IronKey gives users 10 guesses before it seizes up and encrypts its contents forever.

Bitcoin, which has been on an extraordinary and volatile eight-month run, has made a lot of its holders very rich in a short time, even as the coronavirus pandemic ravaged the world economy.

But, the cryptocurrency’s unusual nature has also meant that many people are locked out of their fortunes as a result of lost or forgotten keys. They have been forced to watch, helpless, as the price has risen and fallen sharply, unable to cash in on their digital wealth.

Read this from CipherTrace for a better understanding on the subject

According to the New York Times, of the existing 18.5 million bitcoin, around 20 percent — currently worth around $140 billion — appear to be in lost or otherwise stranded wallets, according to the cryptocurrency data firm Chainalysis. Wallet Recovery Services, a business that helps find lost digital keys, said it had gotten 70 requests a day from people who wanted help recovering their riches, three times the number of a month ago.

Bitcoin owners who are locked out of their wallets speak of endless days and nights of frustration as they have tried to get access to their fortunes. Many have owned the coins since bitcoin’s early days a decade ago, when no one had confidence that the tokens would be worth anything.

For an indepth look at the password conundrum, click here.

Here’s an additional 5 crucial bitcoin predictions for 2021 from fintech expert James Ledbetter I thought needs a highlight

cryptocurrency example
Photo: CFI

When the U.S. first began grappling with Covid-19 in early March, bitcoin was below $4,000. For owners or sellers, it’s a gut-twisting source of gains and losses. For those on the sidelines, it’s an entertaining market show, with tinges of jealousy and dizziness.

Despite that tremendous bitcoin price fluctuation — in a generally upward direction — 2020 was also a year of relative maturity for a currency that, after all, has only been trading for a decade. From my perch as editor of FIN, a fintech newsletter, here are what I see as the crucial bitcoin trends in 2021:

1. More mainstream acceptance

Bitcoin’s use in everyday life has always had a chicken-egg problem: Very few use or accept it because … for one thing, very few use or accept it.

But 2020 saw a striking evolution in bitcoin adaptation. Prominent fintech companies, from Square’s investment of $50 million in bitcoin to PayPal allowing its users to buy and sell bitcoin, gave it a stamp of approval.

In 2021, we’ll likely see an extension of this mainstream embrace. Look for at least one major U.S. or European bank to announce some kind of system where they either enable bitcoin purchases or agree to hold digital assets for their clients.

2. Competition from Big Tech

Whatever bitcoin may or not have accomplished in its decade of existence, it has forced a lot of big, global entities to think about offering an international digital currency.

Every company involved in the payment space understands not only that there is a market for digital payments still up for grabs, but that payments involving different currency markets have the most potential. That’s because currently such transactions can take days to resolve, and often involve hefty fees.

Bitcoin has demonstrated, if embryonically, that a global digital currency can dramatically streamline that process. This year, both Facebook and Google — companies with a massive global reach that bitcoin can only dream of — moved forward with big digital currency plans.

Tech offerings like Facebook’s Diem aren’t exactly the same as bitcoin, but if they start to catch on in 2021, they may eat a little into bitcoin’s growth.

3. Competition from central banks

This year, the Bank for International Settlements issued a report and survey indicating that 80% of the world’s central banks are working on some form of digital currency.

China has taken the digital currency experimentation much further than any other nation. Recently, in the eastern Chinese city Suzhou, just west of Shanghai, a lottery was held in which 100,000 residents each received 200 renminbi (about $30) via a digital wallet. They were encouraged to link their digital cash to their bank accounts, and if they didn’t spend their digital cash within a few weeks, it disappeared — both great techniques to advance the experiment.

As China moves toward nationwide adaptation of the digital yuan, it is likely to undercut demand for bitcoin and other independent cryptocurrencies. Next year may see similar experiments in other countries.

4. A new regulatory playing field

President-elect Joe Biden’s administration will have higher priorities in its first 90 days than regulating cryptocurrency, and of course Congress’ mood and expertise on the subject is hard to read.

The natural assumption is that a Democratic administration will regulate more stringently than a Republican administration, yet some have asserted that Biden will be “good for cryptocurrency.”

Maybe, but bitcoin enthusiasts tend to overlook issues like anonymity and its potential use for fraud; for regulators, those are very serious concerns.

Biden’s team might well come up with a more comprehensive and rational way of regulating cryptocurrency, but I would not bet on any favoritism toward bitcoin in particular.

5. Continued volatility

Because the value of bitcoin is not directly tied to any obvious real-world phenomenon (such as fiscal or monetary policy), it can appreciate or depreciate in ways that are hard to predict or even explain.

As an investment, this makes it hard to recommend for anyone hoping to avoid big losses. Some say bitcoin could reach as high as $50,000 next year, and although that seems extreme, it is not out of the question if investors move money from other assets into bitcoin.

Of course, it is just as possible that the price will head in the opposite direction in 2021. The one thing that seems certain is that the wild ride of 2020 will be repeated — so buckle up.

James Ledbetter is the editor and publisher of the fintech newsletter FIN, and the former editor-in-chief of Inc. Follow him on Twitter @jledbetter.

In closing…

The alarming surge in cryptocurrency mining on college campuses | Vectra AI
The most famous of all cryptocurrencies is Bitcoin, although there are many new contenders in the market, known as altcoins. Photo: Vectra AI

“Most cryptocurrencies are notoriously volatile and the increase in institutional participation may be making things worse. While demand would increase and volatility ease should corporations hold Bitcoin for business purposes, the opposite is true when institutions gain exposure for speculative purposes. Empirical evidence from other asset classes suggests that higher participation by institutional investors could increase volatility because of their more opportunistic investment approach,” Michael Bolliger, CIO, global emerging markets, UBS Switzerland AG said in a report on 14 January.

So what do you do with the kind of potential bitcoin is showing currently? According to JPMorgan Chase & Co., bitcoin is looking at competing with gold as an asset class too this year. Probably wait and watch in India because of the complete lack of clarity surrounding it as an investment option.

Although profits from crypto are declared as income from other sources or capital gains, there are several areas where it is difficult to calculate taxes until specified

In 2018, the country’s Income Tax Department issued notices to more than 100K HNIs who had invested in cryptocurrencies without declaring the same in ITRs. In fact, unlike the US, Japan, Australia and some other countries, crypto traders and entities in India often find themselves in tricky situations as there is not much clarity about the taxability of cryptocurrencies.

The lack of clarity regarding taxation stems from the lack of a dedicated policy on cryptocurrencies and their use cases. As the finance minister presents a ‘never-before’ Union Budget on February 1, crypto stakeholders will be looking forward to greater clarity regarding India’s crypto policy and taxation on crypto gains.

Russian cryptocurrency exchange Livecoin hacked and lost control
Another big issue is cybersecurity. Are we up for the task? Photo: Pixabay

Wait & Watch Methinks!

Sources: Mint/Business Insider/CNBC/NYT/Inc42/SportBible

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